2022 (8) TMI 510 - AT - Income Tax

Revision u/s 263 - As per CIT assessee has not complied with the provisions of section 54 and 54EC while claiming exemption under these sections of The Act under the heat Long Term Capital Gains and certain expenses which were considered as cost of flat are disallowable - PCIT has observed that the AO should have examined when actually the property after completion was handed over to the assessee so as to comply with provisions of section 54 as for exemption under section 54 the construction should have been completed within a period of 3 years - HELD THAT - There is no doubt that enquiry on the limited scrutiny issue was initiated by the AO and duly responded by the assessee, the AO also mentioned in the order that The Documents as submitted by the assessee were examined and placed on record , however no remark on the issue has been made by the AO in assessment order, therefore this shall be considered that the AO was satisfied with the enquiries made. Our considered view on this issue is that, if Pr. CIT/CIT is of the view that any enquiry is necessary in the matter, then he should either himself make such enquiry or may get such enquiry conducted. For the purpose of exercising jurisdiction u/s 263 the conclusion that the order of the AO is erroneous and prejudicial to the interest of the revenue has to be preceded by some minimal enquiry by Pr. CIT/CIT. If the Pr. CIT/CIT is of the view that the AO did not undertake any enquiry, it becomes incumbent on the Pr. CIT/CIT to conduct such enquiry. If the Pr. CIT/CIT does not conduct such basic exercise then the Pr. CIT/CIT is not justified in setting aside the order u/s. 263 of the Act. Decision of Hon'ble Delhi High Court in the case of CIT Vs. Hindustan Marketing and Advertising Company Limited 2010 (9) TMI 352 - DELHI HIGH COURT is relevant in this case where the Hon'ble Delhi High Court has held that where the ITO had made reasonable detailed enquiries, had collected relevant material and discussed various facts of case with assessee, order of CIT to direct fresh assessment by going deeper into the matter would not form a valid or legal basis to exercise jurisdiction u/s 263. As on perusal of the fact of the case it is explicitly clear that this case cannot be said to be a case of no enquiry or inadequate enquiry, therefore, proceedings initiated u/s 263 by the Ld PCIT holding the order of AO as erroneous and prejudicial to the interest of revenue are not sustainable, hence quashed. Assessee appeal allowed.

Summary

Issues Involved:
1. Validity of the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, 1961.
2. Whether the original assessment order was erroneous and prejudicial to the interest of revenue.
3. Compliance with provisions of Sections 54 and 54EC of the Income Tax Act by the assessee.
4. Adequacy of inquiry conducted by the Assessing Officer (AO) during the original assessment.

Detailed Analysis:

1. Validity of the Order Passed by PCIT Under Section 263:
The assessee challenged the order passed by the PCIT under Section 263 of the Income Tax Act, claiming it was excessive, arbitrary, and bad in law. The Tribunal noted that for invoking Section 263, the order must be both erroneous and prejudicial to the interest of revenue. The Tribunal referred to the Supreme Court's decision in Malabar Industrial Company Limited vs. CIT (243 ITR 83), which clarified that an incorrect assumption of facts or an incorrect application of law would render an order erroneous.

2. Whether the Original Assessment Order Was Erroneous and Prejudicial to the Interest of Revenue:
The PCIT found the original assessment order erroneous and prejudicial to the interest of revenue because the AO did not adequately verify the compliance with Sections 54 and 54EC. The Tribunal, however, observed that the AO had conducted a limited scrutiny and had made inquiries regarding the exemption claims under Sections 54 and 54EC. The Tribunal emphasized that the AO had examined the documents and was satisfied with the responses provided by the assessee.

3. Compliance with Provisions of Sections 54 and 54EC:
The PCIT argued that the AO should have verified whether the construction of the new property was completed within three years, as required by Section 54. The Tribunal noted that the assessee had made the investment in the new residential property within the stipulated time and had also invested in capital bonds under Section 54EC. The Tribunal referenced various judicial precedents, including the Delhi High Court's decision in CIT vs. Kapil Nagpal, which held that for the purpose of Section 54, it is not necessary for the assessee to become the owner of the property; the investment itself is sufficient.

4. Adequacy of Inquiry Conducted by the AO:
The Tribunal examined whether the AO had conducted a sufficient inquiry during the original assessment. It was noted that the AO had issued a query letter and received responses from the assessee, which were examined and placed on record. The Tribunal referred to the Delhi High Court's decision in Director of Income Tax vs. Jyoti Foundation, which held that if the AO conducted an inquiry and was satisfied, the order could not be deemed erroneous simply because the PCIT felt a deeper inquiry was warranted. The Tribunal concluded that the AO had made reasonable inquiries and the PCIT should have conducted further inquiries himself if he was not satisfied.

Conclusion:
The Tribunal quashed the proceedings initiated under Section 263 by the PCIT, holding that the original assessment order was neither erroneous nor prejudicial to the interest of revenue. The appeal of the assessee was allowed, and the order pronounced in the open court on 06/07/2022.